State of the Industry Report

by John F. Infanger On Jun 25, 2008

Over A Barrel: Industry In Flux
Almost overnight, the business of airports changed; yet, many past issues linger

It is often said that fuel drives the industry. In 2008, it’s driving the industry into the ground — or at least fueling a revolution in how aviation
and airports operate. The U.S. airline industry is in a state of panic; the Federal Aviation Administration is under fire; ‘carbon footprint’ has entered the vernacular; business aviation, having grown into a key transportation alternative, is holding its own, while traditional recreational flyers are leaving their aircraft tied down. And there’s Congress, which continues to prove itself inept when it comes to passing long-term aviation system authorization. It is safe to say, change is here. Following is an analysis of where North American airports and their tenants are today and prospects for the near-term, taken from recent interviews, email requests, and coverage of conferences in Dallas and Denver.

A year ago, the state of the industry was one focused on potential new user fees that would transform how the U.S. aviation system is funded, and on getting long-term authorization passed by Congress. Those issues remain while continuing resolutions have kept the system operating. It is now anticipated, say sources, that an aviation bill will pass after the November elections and will be signed by either President Obama or McCain. It is expected that the bill will call for FAA to revisit contract negotiations with the air traffic controllers union — a provision in the current House bill that President Bush has stated is a deal-killer. Whether or not airports will get the increase in passenger facility charges they seek remains a question.

Meanwhile, the regulators are coming under fire for recent decisions at the U.S. Department of Transportation and FAA. DOT, in an attempt to alleviate congestion in the clog in the system that is New York’s airports, has called for the reintroduction of slot controls at Newark, LaGuardia, and JFK and congestion pricing, opposed by the airlines and the Port Authority of New York & New Jersey.

For its part, FAA has come under the national microscope for its lack of oversight of airlines and maintenance inspections. This became most evident with the grounding this spring of American Airlines’ fleet of MD-80s which, say many, was a knee-jerk reaction by an agency trying to demonstrate that it was doing something. The issue of FAA oversight has filtered down to the FAR Part 135 charter industry. In a recent letter to the FAA Administrator, National Air Transportation Association president James Coyne charged that the agency is demonstrating a lack of consistency between what operators are being told by FAA’s regional offices versus what headquarters is directing.

As important as all of that is, the focus of the industry has turned to the price of fuel. Once projected to have a profitable year in 2008, the U.S. airlines are now scrambling to survive. Only two carriers, Southwest and Allegiant, reported profitable first quarters. The struggle for survival has led to panic among some of the carriers — United Airlines saw its stock value drop 37 percent in one week.

For an instant, it was thought that mergers would be the salvation for some U.S. carriers. That hope has dimmed as merger discussions have come and gone, except Delta/Northwest. In turn, airlines are cutting employees and routes and parking airplanes. Both United and Continental announced major fleet cutbacks as analysis they rethink their business models. They at least continue to operate — this spring saw the collapse of Aloha Airlines, ATA, and the one-year wonder, Skybus.

The impact of all this scrambling has left the airport industry in a field of uncertainty. In particular, smaller communities are seeing their air service disappear. A year ago, the attention was on increasing air service; today’s it is on maintaining what’s in place. It is expected that more air service cuts are on the horizon.

There is a void being created and how that void is filled is a question that remains to be answered. One possible answer is with the very light jets now entering the marketplace. The concept of a network of VLJ air taxi companies, led by DayJet in the Southeast and Linear Air in the Northeast, remains a possibility. However, the tight investment market caused by the collapse of the dollar is stifling this prospect, evidenced by recent cutbacks at DayJet.

Another possible answer for small communities is an expansion of the Essential Air Service program. While not yet part of the aviation discussion in Congress, it’s on the table. Comments NATA’s Coyne, “I am sure there will be proposals to expand it, though I would expect Bush would oppose it. I would predict that next year either McCain or Obama would be under a lot of pressure to support a Congressional expansion of EAS.

“It’s hard to get hard answers from the candidates about that. But I think there’s a strong interest, and the rural communities really need something like that.”

Globally, the aviation and airport industry remains hot in the high-growth areas of Asia. There, developers are taking an ‘airport city’ approach of comprehensive development in which the airport is at the core. It’s a concept being emulated by several major U.S. airports. (See story, below)

For business aviation, a mixed report
For fixed base operators and business aviation, high fuel prices are having an impact, but nothing like what’s happening with the airlines.

Comments Dan Hubbard, VP of communications for the National Business Aviation Association, “There’s no question that fuel costs are adversely impacting general aviation. We’re hearing from reliable fuel providers and charter companies that, because of the cost of fuel, purchase of jet-A is down anywhere from 10 to 20 percent, and purchase of avgas is down 30 to 40 percent.”

That is causing operators to shop price, putting pressure on FBO margins. Says NATA’s Coyne, “They’re really having a hard time maintaining margins. And, of course, their costs are going up as well. Most members are spending more on energy themselves. To heat a hangar this winter is going to cost twice as much as last winter. To fuel all the ramp vehicles is going to cost twice as much.

“You would think with a doubling of fuel prices the margins would double, but they haven’t. It’s much tougher to make money in the FBO business in 2008 than it was a two or three years ago.”

Allocating Capacity — the Debate Continues

DENVER — Despite the upheaval in the U.S. airline industry in 2008 that is seeing reduced capacity in the system, there remain pockets of activity that have the U.S. DOT and industry debating how to manage congestion. Much of this discussion is centered on the three commercial airports around New York City, although airports in Chicago, San Francisco, and Los Angeles could in time be affected.

The issue of “congestion pricing” and slot allocations was a focus of the discussion of this year’s annual Airport Economics & Finance Conference held this spring in the Mile High City and hosted by Airports Council International-North America.

Comments Dr. Steve Van Beek, president/CEO of the think tank Eno Transportation Foundation, “We have a fundamental mismatch” between the needs of the system and capacity allocation. Van Beek says his concern is that the discussion is centering more on who has the power versus finding real transportation solutions, ones that take into account other modes like regional rail.

“Everybody has a piece of the blame and all have a role in the solution.”

David Berg, counsel for the Air Transport Association, which represents the major U.S. air carriers, says that his members strongly oppose congestion pricing. ATA thinks the discussion should be focused on accelerating development of the NextGen air traffic control system.

Says Berg, “We don’t think this is a time to experiment, particularly with the auction of slots.” He also questions the authority of DOT to implement its new policy.

Debbie McElroy of ACI-NA calls the concept of congestion pricing “appropriate” but says the association disagrees with slot allocations proposed by DOT. She relates that airlines use a form of congestion pricing in their daily operations. “They use it every day in their own yield management system,” she says.

On the topic of slots, McElroy says ACI-NA agrees with its member that is being impacted by the DOT move — the Port Authority of New York & New Jersey. “We think the airport is the one that should be doing that,” she says.

Frank Berardino, president of consulting firm GRA, Inc., says the issue of slot allocation is essentially one of property rights. DOT, he says, has basically said that it owns the rights to slots and thereby has the authority to allocate them. That is, since FAA controls the airspace, it controls the slots.

“There are plenty of precedents for auctioning,” says Berardino. In the past, he says, slots were not clearly defined from a property rights standpoint. In the 1990s, the situation got to the point where airlines were selling slot allocations as well as using them for collateral for financing.

Integrated Development

DALLAS — This spring, airports from around the world converged at DFW International Airport for the fifth annual Airport Cities World Conference & Exhibition to share their experiences of integrated, regional planning that is today central to their development efforts. In the U.S., airports leading this charge include DFW, Memphis International, and Detroit Metropolitan. Globally, airports in China and the Middle East are taking large-scale integrated approaches to airport-associated development. Here’s a recap of several of these initiatives.

DFW international
John Terrell, VP of commercial development, relates that DFW has a string of new developments underway, including what he calls the largest infrastructure project in Texas history. On the north side, the “connector project” involves recreating the entire highway infrastructure network, affecting up to eight neighboring cities. That is in concert with a metro rail link on DFW’s east side, which will connect the Metroplex to the airport, and subsequently the airport terminals. The station site lies within 2,300 acres that will feature office and retail development.

South Gate Plaza, built adjacent to DFW’s new consolidated rental car facility featuring hotels and restaurants and a skywalk to the rental center.

Memphis international
Larry Cox, CEO of the Memphis-Shelby County Airport Authority, says the goal is to make the region around MEM a world model Aerotropolis. “The airport drives the economy,” he says, driven by FedEx and Northwest Airlines and accounting for one in four jobs in the region.

Cox says there is a “culture of collaboration” to create the Aerotropolis, from Beale Street to Graceland to the Convention & Visitors Bureau to St. Jude’s Hospital. Some specifics:

Memphis ED — an economic development initiative involving 2,500 business and community leaders, with an investment of $60 million in project management alone.

Memphis Airport Area Development Corporation, which is focusing on improving the quality of life for those around the airport and to lure new investment.

An ‘airport city’ just south of the airport, integrating the efforts of three states and five counties.

Detroit metro
With the auto manufacturing industry in decline in Detroit, civic leaders are moving to make DTW a world gateway via the Detroit Region Aerotropolis, explains county executive Robert Ficano. The initiative is being coordinated with nearby Willow Run Airport.

“It takes a region,” says Ficano, defining the concept. The airport authority and eight cities, counties, and townships have entered a memorandum of understanding as the region embarks on $670 million in economic development that’s been committed over the next two years.

China
According to Ping Wang, partner with Garfinkle & Wang Associates, China has 149 commercial airports and he projects that number to grow to 244 by 2010. Prior to 2002, he says, all airports in China were owned by the national government, after which they were transferred to local ownership. That move, he says, “opened a very important door.”

Beijing Capital Airport pioneered the airport city concept in China, he explains, adding that most of the top 15 airports in China are undergoing airport city development projects. China is the second largest aviation market after the U.S., and has experienced double-digit cargo growth for the past ten years. Some key projects:

Guangzhou Baiyun Inter-national Airport has been tagged to become the Asian-Pacific hub for FedEx. The airport has 88 square kilometers of land available for development with rail/highway infrastructure already in place.

Yunnan Province Airport Group is developing the nation’s fourth largest gateway airport with an investment of some $3.3 billion in Phase 1. It is one of 11 new airports planned for the province.

The middle east
Dubai Airports, home of Emirates Airlines, is in the midst of transforming its airport into an Aerotropolis — Dubai World Central — that connects to several airport cities, explains Anita Mehra Homayoun, VP of marketing. Rail will connect the airport to all of Dubai, and an adjacent port will become a ‘maritime city’ that features a bonded corridor for trade.

Emirates takes delivery of its first Airbus A-380 jumbo jet this summer, and has 57 on order, making it the largest A-380 customer. It will occupy the newest of three terminals. The airport has six parallel runways.